Where were the regulators?


I watched It’s a Wonderful Life the other night at the end of another bad week of worry about the economy, hoping for a reminder about perspective. It didn’t work, but not for the reasons you might think.

I’d driven up to Ely and back on Friday and so I spent much of the day hearing about the economy. Have you heard? It stinks and it’s only a matter of time before it swallows all of us, the narrative seems to suggest.

I couldn’t get the day’s bad news out of my head as I watched the movie. Here’s why: In the course of one afternoon, Uncle Billy misplaced the credit union’s receipts, Mr. Potter stole the envelope with the cash, the state banking investigator showed up to audit the books, a warrant was issued for George’s arrest and the investigator and cops showed up at the Bailey household a few hours later. All in one afternoon!

Boy, those were the days.

Bernard Madoff ran a Ponzi scheme that ripped off $50 billion (including $100 million from Twin Cities investors) and nobody who was supposed to notice noticed. Bloomberg reports today that the Securities and Exchange Commission never inspected Madoff’s books, even though it was required to:

Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. “It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems.”

On National Public Radio today, Jim Zaroli reported that a securities industry official warned the SEC in 1999 that Madoff’s returns were too good to be true.

Congress doesn’t seem to be in too big of a hurry to find out what’s going on at the SEC, according to the Wall St. Journal:

A spokesman for Rep. Barney Frank, the chairman of the House Financial Services Committee which will be the key in writing the new regulatory structure for the financial industry, said that “in due time” the committee would work with the SEC to see “what if any, failings of policy” were revealed from the alleged Madoff fraud. He said Frank hasn’t been in touch with the agency.

On NPR’s All Things Considered this afternoon, a former SEC official said there aren’t enough people to keep up with the crooks (although he didn’t use that word). It’s a view shared by Columbia Law School professor John Coffee, who told the Journal that the agency is overworked and typically only examines 10% of the new funds that are registered.

The Madoff story, of course, is huge. Even the Dow’s drop today is being pegged on it. But Matthew Goldstein, writing in BusinessWeek, suggests it’s no bigger than Tom Petters’ alleged scam in Minnesota:

Consider how little national coverage a similiar alleged Ponzi scam involving Minnesota businessman Tom Petters has generated. Sure, the alleged damages in the Petters affair are smaller–but a $3.5 billion loss isn’t chump change. Some six-dozen hedge funds and their hundreds of individual investors suffered huge losses when federal prosecutors alleged that Petters was borrowing money for several companies that existed on paper only. At least a few of the victims include wealthly widows in their 90s, living in Florida, who invested in one of the hedge funds.

If there’s anything to salt away from the Petters and Madoff cases (and the economic meltdown in general) it’s this: If you’re making money with an investment, find out why.

  • Paul

    “If there’s anything to salt away from the Petters and Madoff cases (and the economic meltdown in general) it’s this: If you’re making money with an investment, find out why.”

    There that, and there’s: “Don’t be stupid”. Never in history has a society turned socially, politically, or economically essential responsibilities over the the greediest people any given society produces, and seen it end well. Behind every bubble, every recession, every downturn, there lay greedy people committing massive fraud, whether legal or illegal (we legalized a lot fraud during the 80s and 90s). You cannot trust these people to produce the best results for everyone, they don’t. Fine, we can have an economy with rich people, we can have an economy that allows some people make more money than others. But you cannot have an economy without any regulation or oversight, not if you don’t want a recession every 8-10 years. I hope we’re waking up from the nightmare of faith based economics.